Examining US-Japan Cooperation in the Economic Security Era

Politics Economy

The increasingly fraught US-China relationship presented Japan with a difficult challenge even before being exacerbated by the pandemic and Ukraine conflict. Two leading specialists in Japanese economic and security policy discuss what the country must consider as it manages its relationship with Washington in these difficult days.

Saori N. Katada

Professor of international relations at the University of Southern California. A specialist in international politics, she was an international program officer at the United Nations Development Program and a researcher at the World Bank. Author of books including Japan’s New Regional Reality: Geoeconomic Strategy in the Asia-Pacific (2020) and coauthor of Taming Japan’s Deflation: The Debate over Unconventional Monetary Policy (2018), among other works.

Mireya Solís

Director of the Center for East Asia Policy Studies and Philip Knight chair in Japan studies at the Brookings Institution. A specialist in Japanese foreign economic and trade policy and Japan-US relations, she has also taught at the American University’s School of International Service. Her books include the 2017 Dilemmas of a Trading Nation: Japan and the United States in the Evolving Asia-Pacific Order, which won the 2018 Ōhira Masayoshi Memorial Award.

A New Landscape

The global economic order is in turmoil, with heightened uncertainty in the 2020s. China’s increased economic clout has frequently translated into coercive use of its power against its neighbors in the form of export bans or import boycotts. Many disasters and crises, from the COVID-19 pandemic to Russia’s war on Ukraine, have ushered in a decade with intense risks and uncertainty for economic activities, at a level that the world has not experienced for the last several decades.

Exacerbating such uncertainty is the conflict between the United States and China. The tension unquestionably intensified under former US President Donald Trump with an added economic security dimension, which continues under the present Joe Biden administration. An old-fashioned trade war with tit-for-tat tariff hikes between the United States and China has now turned into more serious decoupling measures of investment screening, export controls, and an alliance on semiconductor supply chains to counter China. Global supply-chain vulnerabilities and risks of cross-border economic interdependence create incentives for reshoring, near-shoring, and friend-shoring with the goal of locating advanced manufacturing activities at home or in trusted countries.

Throughout all these upheavals, economic security has emerged at the center stage of governments’ foreign policy priorities. Economic security covers a broad swath: from supply chain resilience—with a focus on critical technology and strategic minerals—to technology and patent protection, protection of critical infrastructure, both physical and cyber, and investment screening and research collaboration. The good old days of uncritical globalization have all but dissipated.

What does this all mean for US-Japan economic relations? Saori Katada from the University of Southern California and Mireya Solís from the Brookings Institution discuss major implications for bilateral ties and the Indo-Pacific region.

Policy Innovation at a Fast Clip

SAORI KATADA  What is your assessment of how the United States and Japan are dealing with the emerging challenges so far?

MIREYA SOLÍS  With the profound change in the risk landscape in the world economy, it’s not surprising to see substantive policy innovation in both countries, both to reduce vulnerabilities and to press advantages. There are many measures, but we can place these policy responses in three different baskets.

The first set aims to shape the regional environment. Japan’s Free and Open Indo-Pacific concept was launched in 2016 just before great power competition came into sharp focus. As such, it was influenced by the forces that have exacerbated state rivalry and economic risk: Chinese revisionism and growing strains of US unilateralism, among others. Japan’s FOIP is fundamentally an attempt to shore up regional stability and economic growth by emphasizing the centrality of an open, noncoercive, rules-based system. The CPTPP, or Comprehensive and Progressive Agreement for Trans-Pacific Partnership, best captures Japan’s new role: both in rescuing the trade agreement after the US withdrawal from the original TPP and ensuring that China’s accession bid does not come at the expense of CPTPP’s ambitious standards.

Washington has broadly embraced the FOIP construct, but the Trump and Biden administrations have followed distinct approaches. Biden, unlike Trump, believes alliances and coalitions are critical for the United States to achieve its objectives in the region and to outcompete China. Hence, minilateralism has flourished of late: the Indo-Pacific Economic Framework, a leaders’ level Quad, and AUKUS, which brings together Australia, the United Kingdom, and the United States. There are elements in the IPEF that show promise: a crisis management mechanism for supply chains and regional digital economy rules. The IPEF, however, will not offer market access benefits nor will it be subject to Congressional ratification, so it will be hard pressed to meet regional demands on two important fronts: access to the US market to spur regional growth and long-term commitments that can survive the vagaries of US domestic politics.

Second, we have a retrofitted policy toolkit to boost economic security. The national security implications of high levels of economic integration have revived the role of the state—both in the regulation of international economic transactions and in the promotion of technological competitiveness. The United States and Japan have adopted similar, but not identical, economic security policies: tightening the screening of foreign direct investment, strengthening cybersecurity, correcting for overdependence of supply chains on China, and industrial policies to promote advanced technology and manufacturing. In essence, it is a quest to be less vulnerable to exploitation by others and more indispensable, namely by increasing others’ reliance on your technology and products.

And third, we have the elevation of bilateral policy coordination on geoeconomics. The establishment of the Economic Policy Consultative Committee, or “Economic 2+2,” between the United States and Japan in the summer of 2022 sends the very powerful message that geoeconomics are as central as geopolitics to the bilateral alliance. These minister-level consultations on a regular basis allow the United States and Japan to coordinate more closely on overarching goals in foreign economic policy and to address any potential gaps in priorities or capabilities. But in selecting the American departments involved, State and Commerce, Washington has once again signaled that economic security—not trade liberalization, the traditional remit of the US Trade Representative—is its prized objective.

KATADA  Japan indeed has been very proactive in all these dimensions. FOIP is front and center of the Japanese government’s initiatives to shape the region’s security and economic order, and it also aims to actively involve the United States. On that point, Japan greatly appreciates the US commitment to the region through the IPEF. Nonetheless, the Japanese government will continue to encourage the United States to come back to the TPP.

Moreover, the G7 and G20 have become important forums for Japan to reinforce the rules-based order, as you can see from its Data Free Flow with Trust Initiative and the G20 principles for Quality Infrastructure Investment in 2019. Economic connectivity through trade and investment, along with infrastructure, continue to be not only vital factors for the region’s prosperity, but also tools to integrate China into the international community through more buy-ins to regional cooperation and stability. I think the Japanese government will work to engage its members very proactively as the host of the G7 summit in 2023.

Japan’s path-breaking move on the economic security front is the passing of its Economic Security Promotion Act in May of this year. With the four pillars of supply chain resilience, critical infrastructure protection, patent protection, and investment in critical technology, the Japanese government is working to enhance its strategic autonomy and strategic indispensability in the same line as the United States.

The Japanese government has also fully embraced the Economic 2+2 meeting with US counterparts. Four topics were covered at the first official meeting in July among the four ministers: rules-based economic order, transparent and sustainable lending practices, promotion and protection of critical infrastructure, and supply chain resilience. These represent the risks arising from China’s trade and investment practices. For Japan, blending the objectives of this framework as a counter-China alliance, on the one hand, and making efforts to uphold the liberal economic order, on the other, continue to be a balancing act. Meanwhile, with the clear demarcation of military and business production so far, how to merge security dimension in the Economic 2+2 will be a new challenge for Japan.

Assessing US-Japan Partnership in the New Era

KATADA  Could you talk about how Washington sees US-Japan coordination on economic security? What are the most important areas of alignment, and where are there significant gaps?

SOLÍS  From the US point of view, partnering with Japan to advance shared geo-economic interests holds a lot of promise—and in fact it has already delivered some substantive results. The United States and Japan are in close alignment as they call out Beijing’s disruptive behavior in the Indo-Pacific, like China’s use of gray-zone tactics to advance expansive territorial claims or economic coercion to punish regional actors for foreign policy disagreements. They also share concerns about overdependence on China for critical products in the supply chain. As I mentioned before, Japan and the United States are coordinating more closely on the promotion and protection goals of economic security. Much of this agenda was fleshed out in 2021 during the meeting between President Biden and then Prime Minister Suga Yoshihide, when the Competitiveness and Resilience partnership was announced. At the recent G20 meeting, US-Japan coordination on regional economic strategy was evident on issues such as ensuring debt transparency. We are also seeing an uptick in technology partnerships, with American and Japanese firms pooling their complementarities in the semiconductor supply chain and benefitting from industrial subsidies.

I should note, though, that there are important differences, too, between how each side wants to define the boundaries of competition with China, the methods employed, and how they perceive the windows of opportunity to advance their regional economic influence. The US government is pursuing comprehensive competition that increasingly looks zero-sum and relies on unilateral measures, like tariffs and export controls. Washington has now renewed the objectives of the tech contest: stalling China’s development of AI and supercomputing, and expecting Japan and other allies and partners to adopt similar export controls.

KATADA  From the Japanese perspective, the FOIP has proven to be Japan’s great diplomatic asset. Coalition-building efforts in the Indo-Pacific are advancing beyond US-Japan cooperation. Now, with the Europeans quite keen on participating in the forms—from security cooperation and the infrastructure Global Gateway, to the British application to the CPTPP—the rules-based order is well embedded in this framework. Being able to serve as an interlocutor between Asia and the West is Japan’s long-term aspiration; the Indo-Pacific has given an opportunity for Japan to be the very relevant actor.

US President Biden’s overture to engage Japan fully to counter China, however, is a double-edged sword for Japan, and for most of the countries in East Asia. Support for decoupling has never been strong in Japan, for the very simple reason that the costs would be very high, given Japan’s deeper trading relationship with China. And Tokyo faces the difficult decision of whether to follow the US suit on tighter export controls. Southeast Asian leaders, such as Singaporean Prime Minister Lee Hsien Loong, state that it is impossible for Asian economies with heavy dependence on the Chinese economy to choose between America and China. So the dilemma of being caught between the two giants is not only applicable to the Japanese economy itself; it also dominates Japan’s diplomatic considerations in relation to Southeast Asia. As East Asia has no prospect of fully decoupling from China any time soon, how to balance regional economic integration and the US-led economic security coalition poses a fundamental challenge for Japan.

What Lies Ahead?

SOLÍS  Domestic politics have a significant influence on foreign economic policy. Can you discuss how challenges at home may impact Prime Minister Kishida’s foreign policy, in particular on the economic security front?

KATADA  Yes, domestic politics affects Japan’s foreign policy significantly. Prime Minister Kishida is not standing on firm political ground at this moment, despite his Liberal Democratic Party’s solid win in the House of Councillors election in July this year. His challenges are many—the after-effects of Prime Minister Abe’s assassination, from the decision to hold a state funeral to the demand for investigation of the LDP’s connection to the Unification Church, the resignation of multiple ministers, and the recent economic stimulus package. It has been difficult for Prime Minister Kishida to focus on foreign policy. As the Economic Security Promotion Act comes into effect in 2023, how businesses follow and effectively sustain the government’s economic security policies will be the key. How do you see the situation in the United States after the midterm elections?

SOLÍS  After the Democrats retained the Senate and lost the House of Representatives, both by a very small margin, in the elections, we should expect the remarkable legislative run of the Biden administration to end. In his first two years, President Biden secured major victories with the Infrastructure Bill, the Science and Chips Act, and the Inflation Reduction Act. While we are likely to see the return of gridlock with divided government, we can expect more “tough on China” bills in the years ahead, since this is one of the few areas of strong bipartisan consensus. This may include the adoption of an outbound investment review mechanism.

I expect the Biden administration to double down on many of its economic security policies that fall under the jurisdiction of the executive branch, for example, export controls. Lastly, I think the midterm results reify the take of the Biden administration on trade policy. It has proven a safe bet in US domestic politics to avoid ambitious market access negotiations or the removal of unilateral tariffs on China. “Stay the course” may be the takeaway from this election.

(Originally written in English. Banner photo: From right, US Commerce Secretary Gina Raimondo and Secretary of State Antony Blinken pose with Japanese Foreign Minister Hayashi Yoshimasa and Minister of Economy, Trade, and Industry Hagiuda Kōichi during the July 29, 2022, US-Japan Economic Policy Consultative Committee meeting in Washington DC. © AFP/Jiji.)

Japan-US relationship Indo-Pacific CPTPP economic security IPEF